Study Renting Smarter Than Buying For Half Of Homeowners

Dated: November 14 2014

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It might be time to rethink the American dream.

Long considered the quickest way the build wealth and encourage saving, homeownership has been steadily declining since 2004 and fell to a rate of 64.4 percent in October, the lowest level in 19 years. Americans 35 years and younger, whose homeownership is near a historic low at 36 percent, have taken lots of heat for their apprehension to buy, but new research suggests they may be onto something.

About 40 million households, or more than half of current homeowners, would have actually been better off financially by renting and investing during the particular period in which they bought, according to a report released Tuesday from HelloWallet, a workforce optimization and research firm.

“It speaks to how unquestioned this goal is in society today and how unable most people are really to answer the question in a way that promotes their self-interest,” says Matt Fellowes, HelloWallet’s CEO and a former Brookings Institution fellow. “They're pretty much all on their own and they're just hearing a unified chorus encouraging them to buy a home when many of those people would have been better off renting and investing.”
Focusing on 20 U.S. cities, the report examined home appreciation, historical behavior of stock and bond markets as well as the cost of renting relative to buying a comparable home, which is referred to as the rent-to-price ratio and is about 5 percent nationally.
The typical median-income prospective homeowner, who makes about $50,000 a year, could generate more than 50 percent in additional wealth over the next decade by renting and investing instead of buying a home, the report found.
The time and place at which they decide purchase is also critical: Median homebuyers that face a 7 percent rent-to-price ratio would only need to stay in their homes four years to accrue more wealth in the purchase compared with renting and investing. But the homebuyer who’s looking at a 5 percent rent-to-price ratio would be better off financially from renting than owning their home for 30 years.
But the problem with millennials is that their decision to delay or forgo ownership is probably most often rooted in necessity. They carry more student debt than any previous generation, form households at lower rates and are still dealing with the post-crisis hangover of worsened job prospects and flat wages.
Renters say their top reasons for not buying is that they have don’t have enough money saved, have too much debt and don’t make enough money, according to research from the New York Federal Reserve.
“They’re being rational by accident. It’s not a good decision that’s well-informed; it’s a good decision that’s kind of by accident,” Fellowes says.
They also have a savings rate of negative 2 percent, the Wall Street Journal reported Monday, meaning that they’re either not saving or they’re in debt. This leaves little room for investing, which is the key part to the renting-versus-owning argument."These simulations assume that renters will invest their extra money, which may well also be flawed. Of course, even if these renters do not save the extra money, they still have the benefit of having extra money every month," wrote the report's author, Aron Szapiro, a consumer finance expert at HelloWallet.
Employers should therefore play a bigger role in helping young people navigate investment opportunities, Fellowes says, just as they do in retirement savings options.“Employers really have an opportunity here to talk to their employees about whether they should rent and invest in these vehicles or whether they should buy,” Fellowes says.

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Angelo F. Terrizzi Jr.

I am a New England native, born and raised in the Boston area. Growing up, I was always involved with extra-curricular activities through school and church. I spent 30+ years in Business and later in ....

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